Seagate Technology and AMD's Earnings Taught Us 1 Important Thing!

After strong earnings from Hewlett-Packard (NYSE: HPQ  ) and Intel (NASDAQ: INTC  ) , many thought that the PC recovery would be felt among all companies with heavy exposure to the space. However, Seagate Technology  (NASDAQ: STX  ) and Advanced Micro Devices (NYSE: AMD  ) beg to differ. Therefore, should you avoid both?

Expectations for an industrywide recovery
Intel and Hewlett-Packard gave investors real hope that the PC market was seeing a real recovery, and therefore shares of both companies have soared in excess of 25% this year alone. Specifically, Intel released earnings earlier this week with revenue growth of 8% year over year.

There were many reasons for Intel's strong performance, but mainly the 6% improvement in its PC client group segment, a unit that accounts for more than 60% of total sales. In the past, this segment has been one of weakness, but its new-found strength insinuated to many on Wall Street that a full-blown PC recovery was on tap. As a result, with AMD being Intel's much smaller equivalent, investors assumed it, too, would benefit from this recovery.

HP's boost came directly from a 7% rise in PC sales. While the company's total revenue growth remains flat, thanks to several struggling segments like printing and hardware, PCs have now become its single greatest strength. Moreover, a 12% rise in enterprise PCs bodes well for hard disk drive makers like Seagate Technology, a company that has large exposure to the space as a primary provider of storage products for businesses.

Investors assumed too much
In reality, the success of HP and Intel is not a direct reflection of the entire PC space. In retrospect, how could it be? According to IDC, global PC shipments fell 1.7% year over year during the second quarter. Therefore, if HP and Intel saw a 7% and 6% rise, respectively, in PCs, weakness had to be experienced in other areas.

Therefore, Seagate Technology's 3.5% decline in overall revenue is a good illustration of this theory. Specifically, its enterprise drive shipments, an area of strength for HP, fell 10% year over year to just 7.4 million units. Also, desktop drives fell 2% to 18.6 million.

With that said, if Seagate is performing badly, then it also means that another company is performing better, given the volatility within this space. This assumption is supported by the fact that Seagate estimates its share of the hard disk drive market as 39%, down from 40% in the second quarter last year and 42% in the first quarter of 2013.

In regard to AMD, the company went in the complete opposite direction of Intel. In the second quarter, its PC and server segment saw a 20% year-over-year decline. Notably, Intel saw 6% growth in this segment. Thankfully for AMD, it also benefits from graphics and visual solutions, a segment that grew 141% due to the continued success of the Xbox One and PlayStation 4 gaming consoles.

As a result, total revenue for AMD increased 24% during the quarter. Still, with AMD's performance, it's clear which company really benefits from a rise in PCs -- Intel.

Foolish thoughts
With all things considered, it's almost impossible to be bullish on either Seagate or AMD right now, as the fickle performance of PC-related companies is an eye opener as to which companies have a competitive edge. For AMD, it's certainly benefiting from graphics growth, but once that demand for new consoles runs dry, it will be left primarily with a PC chip business, which is lackluster at best.

Then there's Seagate, a company whose decline in market share tells investors everything they need to know about its products. As a result, Seagate and AMD taught us one important lesson looking forward: the strength in this space is not industrywide, and HP and Intel are the only sure things until other companies associated with the PC market prove otherwise.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

 


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3034751, ~/Articles/ArticleHandler.aspx, 12/21/2014 7:00:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement